Just what causes the ups and downs in natural
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PRICE VOLATILITY IN THE NATURAL GAS MARKET – “WHAT ARE THE FACTORS?” February 28, 2003 Just what causes the ups and downs in natural gas prices? What are the factors anyway? Sometimes it’s just one thing and at other times it’s a mix. CGA provides this briefing to help you understand some of the reasons for natural gas pricing. Ottawa (February 28, 2003) – The commodity price of natural gas is determined in the marketplace and is not regulated. There is a single North American market for natural gas. The key factors that affect the price of natural gas include supply, demand and storage levels in North American gas markets. Typically, prices increase during the winter months when demand is greater and decrease during the summer months when demand is lower. Natural gas prices are also influenced by oil prices to the extent that there is competition between oil and gas, particularly in industrial markets and electric utility markets (fuel to produce electricity). While commodity prices are not regulated, the price negotiated between a local distribution company (LDC) and its suppliers must be authorized at the provincial level. Not only that but LDCs are not allowed to make any profit on the sale of the gas itself. What’s going on today? The graph below illustrates how the recent volatility in natural gas prices and the price spike of 2000 translate to a monthly average commodity price. While there certainly is daily volatility in the market place – as we’ve seen in the last week of February – on average the price is for all intents and purposes seasonally cyclical. The colder than normal winter we have been experiencing in Canada and the U.S. has caused greater than normal natural gas usage. For instance so far this winter in central Canada, it’s been 14% colder than a normal winter. Compare this to last winter where it was in fact 16% warmer than normal, and it’s understandable why demand for natural gas is high. While long-term supplies of natural gas are abundant, supplies from conventional basins are declining. Natural gas delivery and storage systems have been running at full capacity to keep up with the increased demand this winter. This has resulted in very low natural gas storage levels in Canada as LDCs successfully manage the huge draw on their pipeline and storage systems. A decrease in drilling activity in 2002 has somewhat compounded the problem. Therefore, since pressure on demand has been greater than supply during this heating season, there’s been a corresponding upward pressure on the price of the commodity. The American Gas Association (AGA) gave testimony at a Senate Energy Committee hearing on “Natural Gas Supply and Prices” this week (February 25) wherein they stated that the relationship between natural gas supply and prices is at a critical crossroads. Their contention is that in North America, we need to ensure strong supplies of natural gas in order to dampen some of the volatility of wholesale gas markets. CGA agrees with the AGA assessment and expands on this by pointing out that natural gas prices are tied to market forces like all commodities but that the North American market is so diversified that no-one stakeholder can dictate the price. Consumers and suppliers respond to market signals and when those signals indicate overwhelmingly that supplies are tight – for whatever reasons – then price spikes occur. Witness the signals sent by recent world events relating to the Middle East, Venezuela plus the recent oil transfer station explosion on the U.S. east coast that have caused increases in the price of oil. While oil pricing is a function of world markets and natural gas is more or less a function of the North American market, there’s certainly a link between the two commodities as heating fuels and the corresponding differential price. Therefore, as oil prices increase, there is some upward economic or financial pressure on the price of natural gas. These circumstances have all combined to signal a squeeze on supplies and when that happens, fundamentals of supply and demand economics kick in and the price goes up. Going Forward Fortunately, we are nearing the end of the heating season, and it’s expected that consumer demand will ease up correspondingly. However, what effect this will have on the commodity price of natural gas is difficult to predict, as there will still be pressure on natural gas delivery systems to refill depleted storage during the off-heating season. That’s why it’s so important for government to create the right regulatory climate allowing natural gas transmission and distribution companies to expand their infrastructure in a fair and equitable manner. This will go a long way to ensure that strong supplies of natural gas will indeed dampen the volatility we are seeing today. It’s also important to know that CGA member companies successfully operate their transmission and distribution systems to manage the impacts of high demand on supply. They also actively participate in and promote programs that help customers manage their energy bills such as energy efficiency and customer education programs. Finally, it’s important to know that clean, reliable and environmentally friendly natural gas – known as a hydrogen carrier – continues to be your most economical energy choice. Natural gas is the best alternative fuel source for reducing greenhouse gas emissions and is the bridge to renewables and sustainability. For more information or to find out how your local natural gas distribution company is working to serve you better, please contact email@example.com.